Why Cash Flow Forecasting Is Key to Your Small Business Success
Most business owners don’t realize how important cash flow forecasting is to their businesses until they realize their businesses may be in trouble—and short on cash. In a QuickBooks report, 61% of small business owners surveyed reported they regularly struggled with cash flow issues, and 32% said cash flow issues hindered their ability to pay vendors, employees, and even themselves. Many businesses turn first to unsecured business loans and business lines of credit when they haven’t done any cash flow forecasting.
Before a cash flow shortage puts your business at risk, we’ll show you why cash flow forecasting is important, what’s included in a cash flow statement, how to do a simple cash flow forecast using your accounts payable and accounts receivable reports, and how a business line of credit can be a lifesaver when your business needs working capital fast.
Cash Flow Forecasting 101
Cash flow forecasting is a method of assessing the movement of cash coming into and out of your business over a specific period of time. Ideally, small business owners and bookkeepers should maintain monthly cash flow forecasts, especially in the startup phase when every penny counts and you’re walking the fine line between success and failure. However, knowing how to do a simple cash flow forecast with cash inflows and cash outflows from your accounting software can also benefit your business as it grows. When you have to make crucial financing and purchasing decisions and enact changes to improve company cash flow, the information you can learn from the forecast is why cash flow forecasting is important.
While a short-term cash flow forecast covers the next 30 days, it’s just as important to take the long view. Cash flow forecasting is important to do annually, as well as further into the future. Looking at the forecast offers insight into your business’s cash flow trends and shows you how big a cash buffer you should build for when unforeseen expenses occur.
Cash Flow Statement
As cash moves in and out of your business, you need to keep accurate numbers on your cash flow statements to get the most out of your cash flow forecasting. The cash flow statement is one of three financial statements business owners maintain to monitor the financial health of their companies:
- Income Statement (or Profit and Loss Statement): Records the total revenues and expenditures for a specific period. The income statement shows your company’s net profit.
- Balance Sheet: Shows the company’s assets, liabilities, and owners/shareholders equity. The balance sheet reflects the business’s value.
- Cash Flow Statement: A cash flow statement shows where the business’s money came from and where it went during any specified period.
The cash flow statement includes the following information:
- Cash on hand (beginning of the period, e.g., month)
- Cash receipts (cash sales, collections, loans)
- Cash paid out (purchases, gross wages, payroll expenses, supplies, repairs & maintenance, advertising, rent, utilities, insurance, etc.)
- Owners’ withdrawal
Use the cash flow statement to gauge your cash flow management. Look at your cash flow statement as if you were an investor. Does it reflect a business with solid cash flow management? Investors want to see how their investments will come back to them as dividends and so does a business owner. On the other hand, is there too much cash on the statement? You could invest that excess cash in buying upgraded equipment or hiring new staff to help your business grow. The statement can also reveal the business’s ability to collect payments from customers and spotlight slow-paying customers the company may need to drop.
Finally, the cash flow statement can show the business owner if they’re selling enough of their products or services. If they’re not, you need to make changes which is why cash flow forecasting is important.
How To Do A Simple Cash Flow Forecast
It will likely take you a few hours to create your first cash flow forecast, but if you invest the time in the beginning and keep the information updated, you’ll see why cash flow forecasting is so important.
Of course, you’ll have to make some assumptions and estimations on your cash flow forecast, but base them on actual statistics and figures—or as close as you can get. Using an excel spreadsheet to model your cash flow is a great idea and it will also allow you to modify it in the future. Whether you use industry stats or numbers based on your business’s actual sales and expenses depends on where you are in your company’s life. Some of the cost issues depend on the following industry trends:
- Pricing fluctuations of your products and supplies
- Sales growth potential
- Supply and demand seasonal fluctuations
- Internal labor costs
To forecast sales income, look at your past sales or research industry sales trends. Use real-time stats to note when you typically receive payment for products or services.
Next, make a list of other possible cash inflows and expenses due during the time you are forecasting. For example, you might have an annual insurance renewal payment due or estimated taxes.
Learning as much as you can about your business’s financial state during specific time periods is why cash flow forecasting is important. In general, good business budgeting and planning reduces the probability that your business will fail. If you have a significant expense coming up, a cash flow forecast should show you whether your business can afford to spend the cash or if you need to find an influx of money, such as getting a business line of credit.
Forecasting is Important to Avoid Cash Flow Shortages
All businesses should have a backup plan for contingencies. And that’s another reason why cash flow forecasting is important—having insight into your financial situation helps you avoid unexpected cash crunches.
Getting a business line of credit is another way to help you through cash emergencies. The money is there when your business needs it, and with an unsecured line of credit from Financing Solutions, you don’t have to put up any collateral or personal guarantees. Once your business is approved for a business line of credit, it’s yours to use whenever you need it, and every payment you make frees up that cash to use again. Plus the line of credit costs nothing until used making it a great cash backup plan. It only takes 2-minutes to fill out a simple, no document business line of credit quote and you can decide for yourself if a credit line is worth getting in place now. Business line of credit application.